Ecomonic Times covered our Investing Journey:

Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

Modified on January 10, 2019

“Selecting Top Stocks to Buy” is a series of articles written by us in which we have touched upon various steps required to be taken before an investor decides about investing in stock of any company.

The series contains a few articles, each dealing with different aspect of stock selection ranging from attributes of a good stock investor to detailed analysis of companies. These articles, if read in sequence and implemented with diligence, would help any reader whether he is well verse with finance or not, develop a sound process of stock selection. However, each article is complete in itself. If a reader feels like going through a particular article out of turn, it would be perfectly fine, as it would help her get insights about the particular theme/step covered in that article. However, if you are new to stock markets and wish to learn stock investing holistically, I would recommend that you cover each article one by one in the sequence they are written.

 

Selecting Top Stocks to Buy – A Step by Step Process

 

Getting The Right Perspective Towards Investing

Choosing The Stock Picking Approach Suitable to You

Shortlisting Companies For Detailed Analysis

Understanding The Annual Report Of A Company

Credit Rating Reports: A Complete Guide for Stock Investors

Detailed Analysis Of A Company: A Framework

Financial Analysis Of A Company 

Finding Self Sustainable Growth Rate (SSGR): a measure of Inherent Growth Potential of a Company

How To Analyse Operating Performance of Companies

Valuation Analysis Of A Company

Business & Industry Analysis Of A Company

3 Simple Steps to Assess “Margin of Safety” of a Stock

Management Assessment of a Company:

Final Checklist For Buying Stocks

How Many Stocks You Should Own in Your Portfolio

How to Monitor Stocks in Your Portfolio

Trading Diary of a Value Investor

3 Guidelines for Selecting Stocks Ideal for Retail Equity Investors

When to Sell a Stock

 

Most of these articles have been compiled in the form of an e-book (pdf format). You may read more about the e-book and its feedback from the readers in the following article: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing

A step by step process to learn fundamental analysis to select multibagger stocks for long term investment, Learn Value Investing, Stock Investing, Equity Investing, book, investing books

The learning of these articles has also been compiled in the form of a video series (a premium service). You may know more about it and watch the sample video in the following link:

Learn Investing by Online Videos

Fundamental Analysis, Value Investing, Bottom Up Investing Workshop, Peaceful Investing, Video on Demand, Portfolio Management, Screener Demonstration

 

The below segment of this article contains:

  • A brief summary of the topics covered in some of the articles listed above
  • Elaborations about various aspects of our stock investing approach in response to queries asked by readers of our website over time.

I wish you all the best in your investing journey!

 

Brief Summary of Some of Articles Listed Above

Getting The Right Perspective Towards Investing

This article talks about the attributes that are required in a good stock investor:

  • Reading
  • Patience and emotional control

The article also throws light on certain prevalent myths about expectation from a good stock. Myths state that a stock investors need to have below mentioned qualities, which are in fact not needed:

  • A degree in finance
  • Knowledge of advanced mathematics.

 

Are Your Stocks Losing Money While The Market Is Going Up?

This article highlights the most common mistakes made by individual investors while investing in stock markets:

  • Misinterpreting Financial News Channels as a Reliable Source of Investment Information
  • Seeking Advice From the Wrong Advisor (TV Experts)
  • Letting Emotions Influence the Investment Decisions
  • Not Comprehending the Opportunity Cost of the Money

The article also explains the simple steps to avoid these most common mistakes:

  • Conducting Own Analysis before Buying any Stock
  • Regular Monitoring of Stocks in the Portfolio
  • Avoiding Emotions to Influence Investment Decision
  • Selecting a Good Advisor (if any)

 

Choosing The Stock Picking Approach Suitable to You

This article explains features of different stock picking approaches being followed by stock market participants worldwide:

The article compares features of fundamental and technical analysis to help the reader make her choice between the two approaches.

The article explains different approaches under fundamental analysis:

  • Top-down approach & Bottom-up approach and
  • Growth investing & Value investing

Comparative analysis of top-down & bottom-up approaches and growth investing & value investing approaches is done to explain clarify pros & cons of each approach to readers. The article helps readers to pick up an approach suitable to her interests, time availability and effort requirements.

The article ends with the details of stock picking approach being followed by me: “bottom-up fundamental analysis approach in which I look for high growing companies available at attractive stock prices”. The article also provides reasons and thought process behind selection of the particular stock picking approach by me.

 

Why I Left Technical Analysis And Never Returned To It!

The article highlights the comparative features of fundamental investing vs technical investing and elaborates my reasons for leaving technical analysis and choosing fundamental analysis as my preferred approach of stock investing.

 

Shortlisting Companies For Detailed Analysis

This part of the series elaborates the importance of filtering the universe of stocks before an investor decides to spend time analyzing any one of them in detail. The article highlights that on an average, any filter containing good selection parameters will screen out almost 99% of the companies available on stock exchanges. Therefore, the investor would have a manageable list of 1% of stocks, which she needs to study in further detail for selecting stocks for investment.

The article provides list of different sources available to investors for shortlisting stocks like print or electronic media, local market places and online stock screening tools.

The article provides a step-by-step demonstration of stock screener tool available at www.screener.in

 

Detailed Analysis of a Company: A Framework

This article explains the essentials of the framework to be followed while conducting detailed analysis of companies under different stock picking approaches available to an investor like technical analysis, fundamental analysis and within fundamental analysis, growth and value investing approaches.

The article briefly describes the steps I follow while doing detailed analysis of a company: financial, business & industry, management and valuation analysis.

 

Understanding the Annual Report Of A Company

The article is dedicated to help the reader understand the ultimate source of information about any company: its annual report.

It covers the various sources from where an investor can get the annual report of a company like company websites, stock exchange websites, financial websites or other paid sources.

The article explains different section of the annual report and the way an investor should interpret the information provided in respective section. Brief details about sections containing vital non-financial information about the company and its guidance like communication from promoters and senior management, director’s report, management & discussion analysis, qualifications of persons in charge of the company and report on corporate governance etc. has been covered.

The article explains to the reader about the important parts of the annual report, which contain vital financial information about the company like auditor’s report, balance sheet, profit & loss statement, cash flow statement, notes to financial statements and related party disclosures.

The article helps the reader gain an insight into the annual report and enables her to learn about different sections of the annual report to be referred to find out desired information.

 

Financial Analysis Of A Company

The article covers in the step to be followed while doing in-depth financial analysis of a company. It explains in detail about different parameters, which an investor should use to access the financial health of the company and its business.

The parameters are segregated based on the analysis of financial statement concerned:

  • Analysis of profit & loss statement: sales growth, profitability, tax payouts and interest coverage
  • Analysis of balance sheet: debt to equity ratio and current ratio
  • Analysis of cash flow statement
  • Parameters using mix of P&L, B/S and cash flow statement: cumulative PAT vs cumulative CFO

The article demonstrates the financial analysis by using data of different companies being traded on Indian stock exchanges.

The article provides the threshold values of the eight parameters that an investor must analyse before concluding about financial status of any company.

 

Valuation Analysis Of A Company

The article is focused on the detailed valuation analysis of a company. It explains various parameters that should be analysed by an investor. The article elaborates:

  • P/E ratio
  • PEG ratio
  • Earnings yield
  • P/B ratio
  • Price to sales ratio
  • Dividend yield
  • EV/EBITDA

The article provides the reader with threshold values of all the parameters that should be used by the investor while doing detailed valuation analysis of the company. The article also introduces an important concept of Margin of Safety to the reader.

 

3 Principles to Decide the Investable P/E Ratio of a Stock for Value Investors 

This article is an attempt to help the reader tread on a guiding path to determine the right price i.e. P/E ratio to be paid for a stock. The article attempts to determine a few of the factors that influence the P/E ratio of the stock and tries to bring a some objectivity to the approach of determining the right P/E ratio that the investor might be willing to pay for the stock.

The article focuses on the key criteria that an investor should look at while deciding about the P/E ratio (premium or discount) that she may pay for any company. These criteria would help her in deciding about the maximum P/E that she may pay for a company, which she has initially bought at very attractive levels but the stock has now increased in price and P/E ratio. This would also help her in deciding her strategy for accumulating stocks which are already existing in her portfolio.

 

Hidden Risk of Investing in High P/E Stocks

The current article is an attempt to put in perspective the odds of success and the hidden risks that investors face while investing in high P/E stocks. The article highlights that an investor should focus on finding fundamentally sound companies available at low P/E ratio and avoid buying companies with high P/E ratio. If an investor is able to follow this approach and find a handful of stocks over her lifetime, then she could expect to have the odds of the market turned in her favour. In this way, she can expect to generate significant wealth from stock markets without losing her peaceful sleep.

 

How to earn High Returns at Low Risk – Invest in Low P/E Stocks

This article highlights that stocks with high P/E ratio offer limited return with high risk. Stocks of companies with low P/E ratio offer potential of high returns at low risk.

The article also stresses that low P/E ratio should not be the only criteria for selecting a stock for buying. Investors should focus on finding a conservatively financed, fast growing company available at low P/E ratio. The company should be a fundamentally strong company, which is yet to be recognized by the market. It has to meet all the criteria of the checklist for buying a stock.

 

Business & Industry Analysis Of A Company

This article covers the tools that an investor can use for assessing the business & industry analysis of the company, in which she plans to invest.

Business & industry analysis is one of the most contentious areas where two persons rarely agree upon a common conclusion regarding the prospects of any company or sector. Therefore, the article helps the investor to prepare a framework within which she can analyse the company and arrive at a decision about the company.

The article tries to help the investor find out companies with sustainable business advantage (Moat) by using information available from secondary sources. I recognize that an individual investor does not have the time to access primary sources of information like visiting company stores, manufacturing plants, meeting its customers, suppliers, vendors etc. Hence, the article relies on secondary sources of information and uses various parameters & tools to find out superior companies depicting healthy year on year sales growth:

  • Comparison of sales growth with industry peers 
  • Increase in production capacity and sales volume
  • Conversion of sales growth into profits
  • Conversion of profits into cash
  • Creation of value for shareholders from the profits retained by the company

 

Is Industry P/E Ratio Relevant to Investors? 

The current article is an attempt to elaborate on relevance of Industry P/E ratio in the stock analysis. The article also guides the readers on the importance and usage of Industry P/E ratio in selection of stocks for investing.

 

Management Assessment of a Company:

Why Management Assessment is the Most Critical Factor in Stock Investing? (Moneylife Session Part-1) 

This article focuses on the reasons why I believe that analysis management is the most important aspect of stock analysis. This article gives examples of various companies like Gujarat Automotive Gears Limited where the management has been taking the past, present and future profits of the company away from the minority shareholders.

Steps to Assess Management Quality before Buying Stocks

In this article, we discussed the following tools for management assessment:

  • Promoters’ background check
  • Promoters’ salary
  • Related party transaction
  • Warrants and their misuses
  • Management focused on the share price
  • Dividends funded by debt 
  • Accounting juggleries
  • Competence
  • Promoters’ faith in the business

 

Finding out whether a Company is Cooking its Books/Manipulating its Numbers

This articles aims to help readers in finding out various methods deployed by companies to manipulate their earnings, cash flows and balance sheet metrics. It helps the reader through the key parts of their disclosures, which could have directed a discerning reader to the gimmicks played by the management.

 

Analysing Credit Rating Report of A Company

This article highlights the benefits of reading a credit rating report of a company. The article discusses seven key benefits of reading credit rating reports:

  • Important Business Details and its Key Strengths & Weaknesses
  • A Glimpse into the Critical Confidential Information
  • Key Factors affecting Company’s Performance including Key Risks that it might face going ahead
  • Another Independent Opinion apart from the Statutory Auditor, on the Company’s Financial Position
  • A Third Party Verification of Investor’s Analysis
  • Year on Year Credit Rating Movement: Good Proxy for the Performance
  • Rather than a Rating, it’s the Movement of Credit Rating, which is More Important

 

Assessing “Margin of Safety” of a Stock

This article highlights the importance of one of the key parameters of stock investing: Margin of Safety. The article provides easy to use assessment tools to find out the margin of safety provided by any stock investment. The article discusses key sources of margin of safety for a stock:

  • Margin of Safety in the purchase price:
    • Earnings Yield being higher than 10 years bond (Government Securities) yield

 

The Final Checklist For Stocks Analysis

This article is a compilation of all the checklists, which have been described under detailed analysis of financial, valuation, business & industry and management aspects. This is a checklist which is would come very handy for any investor while doing stock analysis.

You may share this article as a summation of all the learning of the entire series “Selecting Top Stocks to Buy”.

 

How To Analyze Operating Performance of Companies

This article contains a guide to 5 simple steps, which help an investor gauze the level of operating efficiency that a company has displayed in the past. Operating efficiency forms an important parameter to evaluate the performance of any new investment opportunity as well as for monitoring the ongoing performance of existing portfolio companies.

Analysis of operating performance helps an investor to differentiate a good performing stock which sound underlying business practices. If followed diligently, the steps shared in this article can help an investor in finding out the red flags of accounting  manipulations by unscrupulous companies.

I believe that analysis of a company on the parameters shared in this article is essential before an investor commits her hard-earned money to any stock.

 

Finding Self Sustainable Growth Rate (SSGR): a measure of Inherent Growth Potential of a Company

SSGR is the measure of the potential of a company to which it can grow in a debt-free manner. We notice that there are certain companies, which keep on growing with deploying funds from internal accruals whereas there are other companies, which regularly need to resort to alternate sources of funds like debt & additional equity to finance their cash-flow requirements. SSGR parameter helps us identify, whether any company has the ability to sustain its growth by using cash generated from its profits.

The article elaborates the method of SSGR calculation and its successful application on multiple companies belonging to diverse industries.

SSGR can serve as a useful guide and an additional parameter for stock selection for a fundamental investor.

 

How Many Stocks You Should Own in Your Portfolio

This article aims to highlight the need for having an appropriate number of stocks in an investors portfolio. The article guides an investor to decide the suitable number of stock for herself by explaining the lower and upper limits to the number of stock in a portfolio. The investor would be able to understand the benefits as well as pitfalls of increasing the number of constituent stocks in her portfolio.

 

How to Monitor Stocks in Your Portfolio

Monitoring of stocks in the portfolio is as important an exercise as the selection process. The current article guides an investor to the activities required to effectively monitor her portfolio by helping her delineate such activities under:

  • Ongoing monitoring
  • Quarterly monitoring
  • Annual monitoring

Effective monitoring helps an investor to be on top of the stocks in her portfolio and avoid surprise development, which might lead to erosion of the wealth created by her carefully screened portfolio.

 

Understanding the Quarterly Results Filings of Companies

This article focuses on understanding the key information contained in the quarterly results published by companies and their interpretations. The articles is aimed at helping the reader to develop a framework in getting the critical information from quarterly filings within a short amount of time.

An investor should focus on the following key aspects while studying the quarterly results:

  1. Timing of results disclosure: delay in results disclosure should not be taken lightly
  2. Independent auditor’s review report: should be read for all the key comments
  3. Profit & loss account: focus more on the year till date (YTD) performance, next on the year on year (YoY) performance and least on the quarter on quarter (QoQ) performance
  4. Balance sheet: mandatorily do the funds flow analysis
  5. Shareholding pattern: analyse the change in promoters’ shareholding and pledge levels
  6. Notes to the results: read all the points in the notes carefully to understand developments related to key aspects of company’s developments.

 

Trading Diary of a Value Investor

The article highlights that an investor should develop a stock picking approach suitable to her with her own stock picking criteria and do valuation analysis before buying a stock. Once she develops the habit of analyzing each stock in detail before she invests her hard-earned money, she would be confident about her decision of buying any stock.

The hard work and time invested in analysis would help her maintain a stable view towards her stocks. She would not fall prey to emotions of fear & greed and would be able to think like a business owner and focus on long-term wealth creation. This would enable the investor to hold on to her stocks though out the times of distress and exuberance.

 

When to Sell a Stock 

In the end, it is important for an investor to differentiate between buying & holding a good investment and keeping a poorly performing stock with wishful thinking of seeing its revival. The investor should have a methodical approach to screen her portfolio and get rid of poor stocks so that her time & effort as well the hard-earned money is spent on fundamentally sound stock, which have the potential to create long-term wealth for her.

This article helps an investor with the guidelines to find out potential ‘sell’ candidates in her portfolio.

 

3 Guidelines for Selecting Stocks Ideal for Retail Equity Investors

This article talks about the key challenges faced by retail investors who have a daytime job and also explains the key advantages, which retail investors enjoy viz-a-viz institutional investors.

The article elaborates the ways in which retail investors can overcome their limitations and build upon the advantages available to them.

The article explains the key features that retail investors should look for in the stocks, which would be suitable for them considering the constraints faced by retail investors.

 

Answers of queries asked by readers about “Peaceful Investing” approach

 

Dear Sir,

I have been going through the various articles posted on your blog over the past year and have been asking queries from you as well. Thanks for your time and patient hearing always.

Your approach to investing is really “Peaceful” powered by strong filters you have on management, financial, business, and most importantly valuations. I have numerous queries associated with various articles on your blog, which I wanted to discuss. Some of them may be repetitions; however, I request you to provide detailed answers as always.

1) Criteria for shortlisting companies for detailed analysis:

Do you strictly follow the methods you have specified in the previously mentioned article i.e. companies exhibiting the following characteristics:

  • Sales growth 10Years >15% AND
  • Debt to equity <1 AND
  • Price to Earning <12 AND
  • Cash from operations last year >0 AND
  • Market Capitalization > ₹25 cr.

Your approach is to find companies with demonstrated history (7-10 years) of good financial and business performance with impeccable management quality trading at a PE ratio of less than 10. Your basic premise here is that the historic good performance of such companies is expected to continue in the future as well.

How do you arrive at the expected performance part of the analysis, as I understand you do not do any future forecasts / DCF valuation etc.? Mayur Uniquoters Ltd and Ambika Cotton Mills Ltd have definitely been good picks based on your peaceful methodology. However, the revenue growth has slowed down in the past 3 years although the 10-year CAGR is still good.

Advised reading: Shortlisting Companies for Detailed Analysis

 

2) Are we able to find investment opportunities in the current market scenario?

This approach has definitely helped you build a rock-solid portfolio. However, if I am not mistaken, you had spotted these companies during 2011-2014 when the valuation comfort was definitely there. For a relatively younger investor who wants to start investing now, valuation comfort does not appear to be there. In fact, the valuations specifically in the mid/small cap space have started soaring 2014 onwards (a market-wide re-rating a.k.a. Modi rally).

Essentially, what I am trying to say is that you need to sow the seeds during the bear market and for that the wait might be longer. I do not know if you are able to find investible stories in today’s market where the approach is fully consistent with your peaceful methodology, especially the valuations part of your detailed investing approach.

 

3) Investing in companies at turnarounds/inflection points:

I also understand from your various articles that you do not pay too much heed to short-term performance (good/ bad) while finding investible stories. Therefore, the popular theme of finding stocks whose businesses are at the so-called “inflection point” or has just posted the first good quarter/ financial year after a long history of poor performance such as Avanti Feeds Ltd posting significantly high revenues and net profit in FY12, does not work for you as you look for 7-10 years of good performance.

Similarly, there could be situations where the current earnings are close to NIL or negative and therefore PE ratio would be very high or rather infinity and fund managers justify buying saying that the company is on the verge of major change in its business profile and the high PE ratio would be normalized once earnings kick in.

I would tend to think that you would not like such stories. Is my understanding correct?

 

4) Paying very high PE ratio for stocks, which are expected to grow at high rates:

Even the popular theory of justifying the valuation of stocks with 20-30-50 PE ratio by saying that if a 20 PE ratio stock is expected to grow its earnings by 100% in one year, the effective PE ratio that an investor is paying is 10. This does not work with you as far as I have observed you. Many fund managers justify buying stocks with high PE ratio by giving this argument.

 

5) Investing in stocks where we do not see the margin of safety:

Have you bought any stock where you do not see the margin of safety i.e. earnings yield less than 10-year G-sec yield? The current G-Sec Yield is 7.8%, which translates into a maximum PE ratio of 12.8.

I know you recommend paying a bit premium for stocks, which come under your circle of competence and where SSGR is good. However, there also, you have strict limits.

Advised reading: 3 Principles to Decide the Ideal P/E Ratio of a Stock

 

6) Using alternate valuation parameters:

Do you try to justify the valuation by looking at other parameters such as Price to Book Value, Price to Sales, EV/EBITDA, and Industry PE ratio when you are not comfortable with the high PE ratio of a company? Have you taken any buy decision based on that?

 

7) Are we currently buying stocks, which are in our valuation range including existing stocks in our portfolio?

While I understand “Follow My Portfolio” is a premium service, could you please let us know the number of companies that you have in your portfolio today excluding Newgen Software Technologies Limited?

Are you currently buying stocks, which are in your desired valuation band (including existing portfolio stocks)?

 

8) Documentation of stock analysis decisions

Do you document all the analysis that you do i.e. stocks that you have rejected and documented why you have rejected them? Similarly, do you document notes for exited and bought stocks?

 

9) Negative list of sectors:

Do you have any negative list of sectors where you will not waste your time in analysing the stocks? I know you do not like cyclical businesses where revenues and profitability fluctuate a lot even though 10-year CAGR of both revenues and profitability are decent.

 

10) Process for finding new ideas:

What is your workflow for finding new ideas? Screener alone or any other source as well. Do you read all BSE announcements on a daily basis to find new ideas? Alternatively, are you happy with one idea a year aided by online screeners followed by rigorous analysis?

 

11) SSGR vs (RoE x Earnings Retention rate):

I know you do not focus on return on equity (RoE) and return on capital employed (RoCE) and instead focus on SSGR.

Can one use RoE x Earnings Retention rate (where equity is the beginning value of the equity and not the average) as a proxy to SSGR (the way you have shown on your blog)? Are both these ratios the same?

Advised reading: Finding Self Sustainable Growth Rate (SSGR): a measure of Inherent Growth Potential of a Company

 

12) Tools for stock research and contacting management of companies:

Tools for research: Annual Reports, Quarterly Results, Earnings conference call (Concall) Transcripts, Credit Rating Reports, and Industry Reports. What else?

Do you prefer one to one conversation with the management or rely solely on what is available in the public domain?

In case of any doubt, do the company secretaries of the stocks under your research universe respond with satisfactory answers?

Advised reading: How should investors contact Companies/Management for clarifications or additional information?

 

13) Newspapers and magazines:

Any newspaper, trade journal, or magazines that you think have helped you.

 

14) Time taken to complete an analysis:

How much time do you take in general to complete your analysis?

I understand that you like to read the annual reports up to 10 years ago and go through the recent concall transcripts. For Bodal Chemicals Ltd, I noted that you went back to as old as for December 2012 quarterly conference call (concall) transcript. Do you read all quarterly transcripts? On the other hand, was this more for investigating dip in operating profit margin (OPM) during FY12?

I know quantifying time for analysis is quite subjective and depends on one’s intellect and availability of resources. Still, I would like to know how many days/hours on an average you spend after shortlisting a stock for detailed analysis?

 

15) Fear of missing the opportunity while the analysis of the stock is taking its time:

During the long analysis phase, do you worry about the valuations and likely miss of opportunity particularly in a rising market?

 

16) Amount of analysis needed before putting additional money into existing stocks in the portfolio:

You recommend that one should first buy the stocks currently in the portfolio if they come in the desired valuation band. Do you re-do 7/10 year analysis while buying again?

Why I am asking this is the stock could also be trading in the desired valuation range because the market participants believe that the growth has peaked.

Advised reading: How to Decide about existing portfolio stocks: Buy more/Hold/Sell

 

17) Importance of market value created per INR of retained earnings in the stock analysis:

What are your views on the market value created per INR of retained earnings by the company? Here we are factoring in the increase in market cap for every rupee retained. Increase in market cap is a function of the market price of the stock. While we are trying to find good stocks, which are not yet recognized by the market, why are we looking for the increase in market cap? This ratio could well be less than one as the market may not have recognized the stock yet and that should be the desired case. Isn’t it?

Thanks & Regards,

 

Author’s Response:

Hi,

Thanks for writing to us! We appreciate the efforts put in by you in reading most of the article of our website and in the attempts to assimilate our investing approach.

Let us attempt to answer your queries one by one:

 

1) Criteria for shortlisting companies for detailed analysis:

The shortlisting criteria/filtering criteria are used as a tool to narrow down the list of stocks for analysis. We keep on tweaking the parameters depending upon the results provided by the screening tool.

Moreover, we do not prefer to keep a strict valuation parameter in screening filters. This is because in case an investor puts a valuation parameter as filtering criteria, then there might be some good stocks just above her comfortable buying range, which she will never get to know about.

Advised reading: Shortlisting Companies for Detailed Analysis

We do not do future projections. If we are able to convince ourselves that the good past performance is because of efficiency and competence of the management and not merely due to luck/tailwinds, then we rely on the promoter/management to keep doing the good work that she has done in the past. Having financial data & annual reports of the last 7-10 years provides us with a business performance history to make this judgment.

 

2) Are we able to find investment opportunities in the current market scenario?

7) Are we currently buying stocks, which are in our valuation range including existing stocks in our portfolio?

Until now, we have not faced a situation where we have surplus funds and we are not able to find a stock to invest in. As mentioned in various articles on our website and well identified by you, we prefer first look at opportunities in the existing stocks in our portfolio.

We have been investing regularly ever since we started building our current portfolio in 2011, including in today’s times.

As rightly mentioned by you, the “Follow My Portfolio” service is a premium service. Therefore, the details of our portfolio including the number of stocks are available only to the premium subscribers and we would not be able to disclose this information.

 

3) Investing in companies at turnarounds/inflection points:

In our investing journey, we have found that if any stock in our existing portfolio undergoes a bad business period, then we are able to take an informed decision about its future.

Increasing our position in those stocks in our existing portfolio, which are facing headwinds has been a very good investment strategy for us. We could increase our position with confidence in such stocks in our portfolio because we had analysed them in-depth before the first purchase and in addition, we had further improved our understanding of their business by learning more about them as a part of monitoring exercises.

Until now, we do not find similar confidence in our decision making when we find any stock, which is going through a bad patch but is not a part of our existing portfolio.

One reason may be that it takes us quite some time to analyse and then build confidence in our decisions about any stock. Therefore, until now, we have not invested in stocks facing headwinds.

However, we all mature as investors with time & experience. Moreover, if in future, we believe that we have gained enough competence to decide with confidence about the future course of any company, which is currently facing challenging times, then we may start to look at the segment of turnarounds. However, as of now, we avoid investing in stocks outside our portfolio, which are facing rough patches.

Advised reading: How to do Business Analysis of a Company?

 

4) Paying very high PE ratio for stocks, which are expected to grow at high rates:

5) Investing in stocks where we do not see the margin of safety:

We do not believe in paying high PE ratio for stocks, which are witnessing very high growth rates. We do not invest in stocks that do not meet our margin of safety criteria. You may read more about the price that we are comfortable to pay for any stock in the following article:

3 Principles to Decide the Ideal P/E Ratio to pay for a stock

 

6) Using alternate valuation parameters:

We do not use parameters like Price to Book, Price to Sales, EV/EBITDA, and Industry PE ratio in our investing approach.

 

8) Documentation of stock analysis decisions:

We do not document the stocks that we rejected or sold. Moreover, as we have a concentrated portfolio where only a handful of stocks have been added or sold over past many years, therefore, it is not difficult to remember our reasons for purchasing or selling any stock.

 

9) Negative list of sectors

We do not differentiate stocks based on sectors and therefore, we do not have any negative list. Different stocks in the industries behave differently. We have noticed outliers in supposedly cyclical industries displaying stable profitability margins.

This is one of the reasons that we prefer bottom-up approach to investing and not the top-down approach.

 

10) Process for finding new ideas:

We use the screener to find investment ideas. We do not read BSE announcements on daily basis for all the stocks. We follow announcements for stocks, which are in our portfolio as part of our monitoring exercise.

 

11) SSGR vs (RoE x Earnings Retention rate):

SSGR and (RoE x Earnings Retention rate) are not the same. You may read the following article in which we have answered a similar query:

Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

 

12) Tools for stock research and contacting management of companies:

Annual Reports, Quarterly Results, Earnings Concall Transcripts, Credit Rating Reports are usually sufficient resources. Additional resources should be referred to get answers to any queries, which are not resolved by reading these documents.

We have experienced that company secretaries provide satisfactory answers. However, it may need a follow up on her queries by the investor.

 

13) Newspapers and magazines:

We prefer reading Mint, ET, Forbes, Fortune etc. However, they are not indispensable.

 

14) Time taken to complete an analysis:

We usually take a negative decision about any stock within a few seconds/minutes. Our stock analysis excel template, which presents the financial data of any stock from Screener in our preferred format like dashboard helps us in taking quick decisions especially about finding strength and issues in the company’s financials.

Whenever a stock shows promise initially and we start analysing it in detail, then the time spent in the analysis varies. It might be that after analysing it for a week we may come across some factor, which makes us decide against investing in the stock. Otherwise, usually a week to a month’s worth of analysis time may be needed for any stock to get an entry in our portfolio.

While analysing stocks for inputs to readers in the form of an article on our website, it usually takes about 7-10 days to analyse the stock and write the article.

 

15) Fear of missing the opportunity while the analysis of the stock is taking its time:

We do not think about valuations/opportunity cost during the analysis phase in a rising market.

 

16) Amount of analysis needed before putting additional money into existing stocks in the portfolio:

Incremental buying decisions are based on our conviction and views about the stock based on updated information as it arrives in the form of regular results/events. This information is added to the insight/knowledge that we have about the stock from our previous analysis.

It does not take us weeks or months in the analysis before taking the decision to put additional money in existing stocks in the portfolio.

 

17) Importance of market value created per INR of retained earnings in the stock analysis:

You are right that for a stock, which is unrecognized by the market, the market value created may be less than retained earnings. Therefore, if we find that a stock meets all our parameters, then we may remain indifferent to the market value created until now.

Hope it answers your queries. Once again, we appreciate the time & the effort taken by you to go through all the articles of the website.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

P.S.

In future, I would be writing more articles about stock investing, monitoring and other aspects. Therefore, you may like the blog’s Facebook page, subscribe by email or follow the RSS feed so that you would immediately get to know when new articles are published on the blog.

Please provide your feedback on the blog and this series as comments or you may contact me here.

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